When are expenses incurred?
/Expenses are incurred when a resource is consumed. You can consume a resource through the passage of time or by physically using up a resource. For example, you would incur an expense for rent through the passage of time in a rental period, or for depreciation through the passage of time during the useful life of a fixed asset, or for a product when it is sold. For immaterial expenses, such as office supplies, an expense is assumed to have been incurred as soon as these items are purchased, since it is too expensive to keep track of them and record when the items are actually consumed on a later date.
You do not necessarily incur an expense when you incur an obligation. For example, when the owner of a business signs a lease agreement under which his company commits to pay rent for office space for the next three years, the business has incurred an obligation to eventually incur an expense. However, it does not actually incur the expense until it completes each of the various rent periods (when it has "consumed" the rent).
It is possible to incur an expense without having any corresponding supplier invoice or payroll payment to record the event; this arises when the supplier invoice has not yet arrived, or an employee has not yet been paid. In these cases, and if a business is closing its books at the end of the month, it should accrue an expense with a journal entry in order to record the expense in the month in which it was incurred. From an efficiency perspective, expense accruals are not used if the expenses incurred are too small to be material to the reported results in the income statement.
Examples of When Expenses are Incurred
Here are several examples of when expenses are incurred:
A company purchases $500 of office supplies. This expenditure is incurred at once, since it is too difficult to track individual office supplies as assets.
A company purchases a $5,000 computer. This expenditure is incurred in the form of monthly depreciation over the useful life of the computer.
A retail store enters into a five-year lease agreement. This expenditure is incurred each month, when the store pays $10,000 to the landlord.
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Impact of the Soft Close on Expense Recordation
Expense accruals may not be recorded if a company uses a soft close to close the books, in which case expenses will likely be incurred in the next reporting period. In a soft close, journal entries are generally avoided in order to close the books as quickly as possible.